Dynegy Looking to Acquire Enron

Dynegy is holding talks to buy Enron in a deal that has significant backing from oil giant ChevronTexaco, the companies said Thursday.

The Wall Street Journal reported that Dynegy (DYN Quote) would buy the embattled Enron (ENE Quote) for $7 billion to $8 billion in stock.

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Oct. 26	Enron Troubles Only the Tip of the Iceberg?
Oct. 24	Enron's Problems Go Way Beyond Its CFO
Oct. 23	Enron Fails to Smooth Things Over
Oct. 22	Trusts Keeping Enron Off Balance
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Oct. 1	Lessons From Enron's Meltdown
Aug. 30	Trade Winds Blowing Enron Further South
July 12	With Growth Slowing, Enron's Fall Is Far From Over
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The Houston Chronicle and Bloomberg reported that the companies are expected to announce a merger that involves cash from Chevron (CVX Quote); Bloomberg says Chevron, which has a 27% stake in Dynegy, will add $1.5 billion to the deal.

The deal is expected to be a stock swap at a small premium to Enron's Wednesday closing price of $9.05.

A merger would amount to a rescue of Houston energy-trading giant Enron, whose stock has plunged 80% in recent weeks after the company revealed that a shadowy deal caused a $1.2 billion hit to equity.

The controversial deal is under investigation by the Securities and Exchange Commission and has led to the ousting of the company's CFO, Andrew Fastow. The deluge of bad news has prompted other energy companies to reduce their dealings with Enron, a serious development for a trading company.

Dynegy's board was meeting Wednesday afternoon to discuss the merger, while Enron's board was scheduled to consider the combination Wednesday evening.

Chevron's involvement appears critical if the deal is to gain the approval of rating agencies. Dynegy's balance sheet is not strong enough to acquire Enron on its own. Therefore, Chevron is expected to raise its stake in Dynegy and possibly make an immediate cash infusion into Enron. The size of any infusions will be a good indication of how bad things have gotten at Enron.

With the stock plummeting and Enron facing a mounting debt crisis -- $12 billion in direct debt and nearly $9 billion in potential liabilities from affiliates -- the company is running out of options. It recently drew down about $3 billion in existing credit lines and gained an additional $1 billion in credit secured by its pipeline business. Enron debt has been downgraded in recent days by the three main credit-rating agencies.

Sources say a number of potential investors have been approached -- from Warren Buffett's Berkshire Hathaway to Royal Dutch/Shell (RD Quote) -- with little success.

General Electric's (GE Quote) capital division is said to have held multiple talks with Enron with no resolution.

Dynegy may be motivated by its significant exposure to Enron. If Enron had failed, Dynegy could have faced serious disruption and large losses because the two firms are trading partners on a number of contracts. In such a relationship, Dynegy could have contracts to purchase a commodity like power or natural gas from Enron and be committed to sell that commodity to another buyer. If Enron failed to deliver, the domino effect could have a significant economic impact on Dynegy. While other energy trading firms have exposure, sources speculate Dynegy's exposure is more significant than its peers.

Enron was down as much as 20% during the day. Dynegy stock was off 8% in the regular session, while its bonds also skidded on rumors of a deal.